Exam 1: The Equity Method of Accounting for Investments

Figure: Cayman Inc. bought 30% of Maya Company on January 1, 2011 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Year Cost to Maya Transfer Price Amount Held by Cayman at Year-End 2011 \ 30,000 \ 45,000 \ 9,000 2012 \ 48,000 \ 80,000 \ 20,000 Maya reported net income of $100,000 in 2011 and $120,000 in 2012 while paying $40,000 in dividends each year. -What is the Equity in Maya Income that should be reported by Cayman in 2012?

Jarmon Company owns twenty-three percent of the voting common stock of Kaleski Corp. Jarmon does not have the ability to exercise significant influence over the operations of Kaleski. What method should Jarmon use to account for its investment in Kaleski?

Which of the following results in an increase in the investment account when applying the equity method?

A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following statements is true?

Jager Inc. holds 30% of the outstanding voting shares of Kinson Co. and appropriately applies the equity method of accounting. Amortization associated with this investment equals $11,000 per year. For 2011, Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During 2011, Kinson acquired inventory for $62,400, which was then sold to Jager for $96,000. At the end of 2011, Jager still held some of this inventory at its transfer price of $50,000. Required: Determine the amount of Equity in Investee Income that Jager should have reported for 2011.

On January 4, 2011, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams Corp., paying $800,000. There was no goodwill or other cost allocation associated with the investment. Watts has significant influence over Adams. During 2011, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2012, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold?

Figure: On January 1, 2011, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed: Buildings (15-year life) \ 1,000,000 \ 1,500,000 Equipment (5-year life) 2,500,000 3,000,000 Franchises (10-year life) 0 500,000 Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2011, and paid dividends of $100,000 during that year. -How much goodwill is associated with this investment?

On January 1, 2011, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2012, Jordan sold two-thirds of its investment in Nico. It no longer had the ability to exercise significant influence over the operations of Nico. How should Jordan have accounted for this change?

On January 3, 2011, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2011, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2012, Roberts sold 15,000 shares for $800,000. -What is the appropriate journal entry to record the sale of the 15,000 shares?

Figure: On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2011 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2010, was $1,000,000. The book value of Cook on January 1, 2011, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: Net Income Dividends 2010 \ 200,000 \ 50,000 2011 225,000 50,000 2012 250,000 60,000 On April 1, 2012, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. -How much income did Mehan report from Cook during 2010?

Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method?

On January 3, 2011, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2011, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2012, Roberts sold 15,000 shares for $800,000. -What is the balance in the investment account after the sale of the 15,000 shares?

Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2011 and paid dividends of $60,000 on October 1, 2011. How much income should Gaw recognize on this investment in 2011?

On January 4, 2011, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, Mason sold 10,000 shares for $150,000. -What was the balance in the investment account before the shares were sold?

Figure: Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Year Cost to Acker Transfer Price Amount Held by Howell at Year-End 2010 \ 55,000 \ 75,000 \ 15,000 2011 \ 70,000 \ 110,000 \ 55,000 Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. -What is the balance in Acker's Investment in Howell account at December 31, 2010?

Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2010, for $90,000 when the book value of Stanley was $1,000,000. During 2010, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2011, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2011, Renfroe reported net income of $320,000 and paid dividends of $50,000. -How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2011?

Charlie Co. owns 30% of the voting common stock of Turf Services Inc. Charlie uses the equity method to account for its investment. On January 1, 2011, the balance in the investment account was $624,000. During 2011, Turf Services reported net income of $120,000 and paid dividends of $30,000. What is the balance in the investment account as of December 31, 2011?

Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method?

Figure: On January 1, 2011, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed: Buildings (15-year life) \ 1,000,000 \ 1,500,000 Equipment (5-year life) 2,500,000 3,000,000 Franchises (10-year life) 0 500,000 Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2011, and paid dividends of $100,000 during that year. -What is the balance in Jackie Corp's Investment in Rob Co. account at December 31, 2011?